Bull Trap Trading Pattern – A must learn trading strategy

The bull trap is used to call a familiar trading chart pattern that often occurs in a Forex, Futures, and Stock markets. The bull trap pattern is also known as the “upthrust,” the term which came from Richard Wyckoff, founder and onetime editor of Wall Street Magazine. Most experienced traders use this chart pattern to look for trapped traders and benefit from the scenario.

Tech Analysis

Basically, bull trap pattern is a bearish signal forming within an uptrend, which usually occurs in a major resistance level. It doesn’t expect to be on an all-time high. Keep mind that you should look for a bull trap in a bullish market, not in a bear market. There are some instances to catch a turn in a trend yet you should consider that as pure luck.

What really is with bull trap chart pattern?

Market price is in an uptrend then hits the resistance level, breaks out from it and then continues to move higher.

Traders who reach a breakout jump in with buy orders and price shoot up.

Traders are to sell limit short triggered in yet price still move up hitting their stops.

When liquidity dries up within these levels, market price falls back in the resistance zone.

Traders are placed short, breakout then jumps in to take back their loss, then get rejoined after being stopped.

Why identify them as “trapped traders?”

– Gets taken out and be trapped out the market

– Longs are within the market then the price pulls back against it trapping them while they still wish for a bounce-back.

Bull trap pattern trading

Chart pattern may occur in various forms, yet it is the main form. There’s just a need to look for a candlestick that is extremely bullish, break the resistance level, then turns bearish.

Pattern #1 – Bull Trap Trading

On this first pattern that we’ll focus on, the bull trap candlestick breaks then close above resistance zone, yet the nest 1st and 2nd candlesticks after it are bearish.

It’ll show an obvious resistance level.

Candlestick breaks out the resistance level and might close over it.

The second candlestick upon breakout is most probably bearish.

Keep in mind that the next/second candlestick is most probably bearish, about to become a shooting star or a bearish pin bar candlestick.

Pattern #2 – Bull Trap Trading

The second pattern we’ll focus on is when a candlestick breaks out the resistance level and to go up yet eventually close below resistance level to form a bearish candlestick. It is the scenario where bull trap candlestick shoots up and then heads downward forming a bearish candlestick and maybe a bullish candlestick with a bearish momentum.

The price is to break through the resistance level like it’s real upward breakout cause the buyers to jump in.

Bull trap candlestick seeks for the situation of a shooting star or a pin bar candlesticks.

Seek for a bearish candlestick whenever your in these scenarios or an extremely bearish yet bullish candlestick.

Pattern #3 – Bull trap Trading

Our last pattern to focus on, bull trap candlestick breaks out resistance level, goes up yet near below the resistance level. In this pattern, the next one or two candlesticks are more likely a bearish one. Well, the bull trap should be bullish, a green candlestick to be exact. The thing is, it should be nearing under the resistance level. Remember that a bullish candlestick closes below the resistance level will cause a lot of bulls, the price will continue to go higher. Watch out for the first or second candlestick after it, if it’s a bearish candlestick there’s a possibility that it is a bull trap.

Learning What and How Short Selling Stocks Works

At some time from the past years, a person loans a stock from his broker and sell them as an attempt to gain profit. That occurrence makes the term “short selling” is in use within the stock market.

Currently, on one side of the scene, terms “going short” and “shorting” is also a term traders uses in the trading world which means the trader is willing to sell an instrument. On the other side of the scene, terms “going long” and “long” means the trader is willing to buy an instrument.

Short a Stock

Basically, shorting stocks happens whenever an investor borrows shares from an existing owner, in which usually is a stock broker to sell it at a common market price. Shorting stocks arranged with a condition, the shares would only replace at a point within the future. Arranged with a hope that prices would lessen at some point in the future.

When buying stocks, investors would hope for a continued success for the company. That might lead the recognition of share price and at the same time, generate profit for them. The idea is, there would be an unlimited upside as to where the share price could go. That mainly makes short selling risky.

Short selling happens on a margin basis, in which investors do part of the total capital outlay then borrow the remaining from a broker. Similar to a flip coin, traders could gain a more profit when prices go lower, yet can also lose more when marginal price increase.

Within a market that depends on the idea of demand and supply, short selling brings a risk we will call a short squeeze. A short squeeze happens whenever a stock doesn’t fall as anticipated. If this occurs, short sellers are forced to buy stocks covering their short positions. The more these short sellers panic to follow suit and cut their losses. It then generates massive purchase pressure which only occurs to drive stock prices higher.

Usually, large trades curb the risk of short sell by short covering. A short covering occurs to cover an open short position. Majority of short sellers expect prices to go down, yet if they go up, they could decide to lower or eliminate exposure to the short position.

It will then allow traders to cover and protect themselves from the unexpected market move. More importantly, short covering brings traders towards the neutral market position, yet with appropriate and expert timing. Both positions could let traders exit with minimal profits and without any risk.

Fact is, short selling exists with controversial issues. It mainly means one is making a bet on a losing company. Still, the financial market is in nature a cycle, and the opportunity to sell stocks will always come.

Short selling is usually restricted, particularly naked short selling within a lot of exchanges. Whenever conventional short selling entails selling stock borrowed, naked short sell means shorting a stock you don’t own. Meaning the seller could fail to bring the shares to the future buyer and might lead to market distortion. Worst-case is, naked short selling could lead to a market recession.

Short Selling Advantages:

Short selling enables traders to access instruments that they don’t usually being able to trade. When a trader wants to gain from a decrease with an instrument value, he is allowed to without owning the instrument value.

Going short in a particular instrument means opening a selling position, enabling the trader to gain even if the markets are going down.

Minimizing risk for the traders. There’s no need to purchase instruments, instead trade them electronically and gain profit from the fluctuations.

A trader can oversee and control investment with various market orders and stop loss.

A trader can have leverage in short selling, then open positions larger than his main capital.

Spread Betting Short sell

Similar to the idea of short selling but employed to spread betting. When a trader believes in a certain instrument value to increase he can place a bet for each pip price movement. But when the instrument value is expected to decrease, he can place the same bet value for ease pip price point it went on, giving him the same profit.

Trade Ideas: Bull Flag Pattern

There are times when you wait for a market pullback, yet it does not occur, and the market moves higher unexpected. Now, how will you deal with this type of scenario? In this advanced trader educational post, we will teach you a strategy that will help you fix a worst-case scenario in the said situation – bull flag trade pattern.

What is a Bull Flag pattern?

Bull Flag trade pattern is a continual chart pattern which is a signal that the market is likely to move higher. Take note of the following and know how to spot the said pattern:

If there is a strong trend moving higher, the range of the candles is to become bullish than the usual and are tend to close near the highs.

Upon a strong trend going higher, the market will need a break. But expect for a potential bull flag pattern, and the market will have a pullback.

The pullback might consist of smaller range candles as compared to earlier movements. The closer the range, the greater the possibility will breakout higher.

See the sample chart below to know how bull flag looks like:

What is a Bear Flag pattern?

A Bear Flag is just the opposite of a Bull Flag pattern. Also, a continual pattern, but gives a signal that the market is likely to move lower. Take note of the following and know how to identify one:

When there is a strong trend moving lower, the range of the candles is bearish than usual and tend to get near the lows.

Upon a strong trend going lower, the market will need a break. But expect a potential Bear Flag pattern, and the market will have a pullback.

The pullback might consist of a smaller range of candles as compared to earlier movements. The closer the range, the greater the possibility will breakout lower.

See the sample chart below to know how bear flag looks like:

You might think now that the flag pattern is just a pullback in an existing trend. Well, your right but the kind of price movement that shows the pullback is what separates the flag pattern from the normal pullback. What you’re thinking was a shallow pullback consist smaller range candles. Meaning, if you ever saw a steep pullback with big range candles, it might not be the one we’re talking about today (bull flag). Look at the sample chart below to further understand.

Trade ideas and strategy with a Bull Flag Pattern

We should now observe for a first pullback in order to identify a potential bull flag pattern. What’s the first pullback? The term “first pullback” came from a simple market breaks out of range in which pullback occurs for the first time. Whenever the market is in a range, it will soon break out. The longer it occurs, the harder it will break.

When the market then breaks out, traders missing the move might not wait to enter in the first sign of a pullback. The pullback might have a shallow retracement because not a lot of traders like to trade in against to a strong momentum. That now offers a high probability for a pullback trade. Look at the sample chart below to further understand.

Now how to find these high probability pullback trades? These are quite simple, take note of the following step process now:

Look for or identify a range market

Let the market records to breakout.

Now, wait for a bull flag pattern to occur.

Go for a long trade when the trade breaks the highs

Trading with a Bull Flag pattern continuation

Within a strong trending market, it is easier to buy breakouts and then wait for a pullback, yet that rarely occurs. How will you deal with that?

Watch out for a strong trend market

Wait for a Bull flag pattern to occur

Go long upon the break of the highs

See sample chart below for further understanding.

Breakout – Trading with a bull flag pattern

Usually, you can expect the formation of a Flag pattern after a breakout or during a strong trend. But there are times that a bull flag pattern might occur whenever the market is in range, within Resistance. These occur due to lackness of sellers, or the buyers are only willing to buy within the resistance. No matter what, the scenario is a sign of strength and the market might breakout higher. Take note of the following and know how to deal with these scenarios:

Look for a range market

Wait for the Flag Pattern formation within the resistance

Trade upon the break of the highs

Look at the sample chart below to understand further.

Setting your entry, stop, and exit in a bull flag pattern

Now you have an idea what bull flag pattern is and how to trade it, we’ll turn towards knowing how to look for your entry, stop, and exit.

Let’s first focus on looking for a good entry.

You can enter trade within the break of highs, or you could also wait for the market to close over the highs. Now, which of those works better? Actually, there is none, but be cautious and keep in mind that if you enter on a break of highs, it might bring you to a false breakout, but if it’s the right breakout, it will be the best price you’ll get.

For additional decision making thoughts, if you’ll wait for a close over the highs, it could reduce your chance of a false breakout. But when that breakout turns to be a strong one, you’ll end up entering a much higher price. In conclusion, whichever of the two approaches you’ll use, stay consistent and responsible with it.

Now let’s turn to learn how to set a good stop loss.

Best advice here is don’t set a stop loss at obvious levels such as support & resistance and swing high & lows. Look at previous trades, observe how often you decided to make a stop then discovering that the market soon has a complete reversal.

How would you deal with that kind of situation? Set your stops at a distance far from market structure. That simple principle is applied even in a bull flag pattern. Take note of the following and know better:

Know what’s the swing low of a bull flag pattern

Set stop-loss 1 ATR under the low

Apply the opposite action for a Bear Flag Pattern

Lastly, let’s turn to learn how to exit in a bull flag pattern.

There are various ways to exit your winning trade in a bull flag pattern. But it is best to track your stop loss and wait for the market to take you out of the trade. Bull flag pattern appears mostly in a strong trending market (or after it breaks off a range). Such market situations would be best if you choose to ride it to track your stop loss. You can use a 50-period moving average (MA) to track your stop loss and then exit trade of the market gets closer to it.

Advanced trading Guide: Doji Candlestick Analysis

Doji Candlestick Analysis pattern is among the misunderstood candlestick patterns. There are four types of Doji candlesticks. Each has a different meaning and most advanced traders can figure them out. Most books written will teach Doji as a representation of indecision in the markets.

Looking at the length of Doji, you’ll be able to speculate the future market movement. In this post, you’ll learn how to read and analyze Doji candlestick pattern.

What is Doji?

Doji candlestick appears on the trading chart when the market opens and closes at the same price level. It simply means that the market is uncertain if the buyer or sellers are in control.

But there is a variety of Doji with various meaning on each. For now, let us know what usual Doji looks like:

Doji is a simple candlestick pattern. But it differs when taken into context. It provides the traders the sense of how the market will move. For instance, when spotting a Doji in an uptrend. This simply means that the market is in equilibrium (temporarily). Upon enough rest, the market will move higher on the path with least resistance. Observe the sample graphic below:

Avoid this usual mistake:

Majority of traders spot Doji Candlestick Analysis in an uptrend and decide to go reverse. That’s a really bad idea. Looking at the market, if a trend is going upward and been moving higher, why would it lose against a single pattern like Doji?

Different types of Doji candlesticks

Dragonfly Doji

In fact Dragonfly Doji rarely occurs in which the price closes on the exact position it opened. Preferably, there is variation in having a small body with a long wick in the bottom. The meaning will be the same. The important point is being familiar with what it means.

Dragonfly Doji usually appears if the opening and closing prices are at the same level with a long lower wick. Below is a sample of a bullish Doji:

That shows that whenever the market opens, the sellers are going in and pushing the price lower. But it won’t take a long time before buyers take control of the market, pushing the price higher.

How to trade with Dragonfly Doji?

Support marks an area where possible buying may come in. Go long whenever the price comes to support area and creates a Dragonfly Doji. The exact scenario tells you that it rejected lower prices with a high possibility to reverse higher. Observe the sample chart below:

When it comes to trending market, the market would likely bounce off the moving average. But you may go long whenever the price pulls back toward a moving average forming a Dragonfly Doji. Observe the sample chart below.

Gravestone Doji

Gravestone Doji appears whenever the open and close are in the same amount, but with a long upper wick. Below is an example of a Gravestone Doji:

This type of Doji shows that when the market opens, buyers come and push the price higher. But it won’t take long until sellers gain control and push the price lower. The market finally closes with the same price it opened. This is a sign of weakness because sellers are in control.

How to trade with Gravestone Doji?

Resistance area marks the part where possible selling pressure could come. Go short when the price gets close to resistance forming a Gravestone Doji. The scenario simply shows that the market rejected higher price and could reverse lower. Observe the sample chart below.

When it comes to a trending market, Gravestone Doji could make the market bounce off moving average. Go short whenever the price pulls back towards moving average forming a Gravestone Doji. Observe the sample chart below.

Long Legged Doji

Long Legged Doji appears whenever the open and close are in the same price, but with a long upper wick and lower wick. Below is an example of a Long Legged Doji.

This Doji pattern shows that the market is uncertain upon a huge expansion in volatility. This pattern rarely occurs but if it appears, expect volatility to die out for some time before it picks up again.

There are two ways to trade in a Long Legged Doji. Let’s elaborate each.

After huge expansion in volatility, the market will need to take a break before it continues. For a while, the market will be in the range to gain orders before breaking out. That means you can go long on the lows of the Long-Legged Doji. Observe the sample chart below.

Based on the first sample above, whenever the price tests the high/lows a lot of times, it will likely break out. Look at the sample chart below.

That ends our educational post for today. If you want to learn more visit our education archive page and read for FREE! Subscribe now and receive FREE updates on our latest posts!

Volume Spread Analysis – Absorption Volume & Lower Trend Line Chapter 11 Upon witnessing the high volume on a down day, as it approaches the lower trend line, then it will serve as the selling pressure, however if the next day is above, it is ought to illustrate the high volume down-bar repressed buying (absorption […]

Volume Spread Analysis – Absorption Volume & Lower Trend Line

Chapter 11

Upon witnessing the high volume on a down day, as it approaches the lower trend line, then it will serve as the selling pressure, however if the next day is above, it is ought to illustrate the high volume down-bar repressed buying (absorption of the selling) in order to lift the market the following day. Now, take note that this is a sign of strength.

Be that as it may, you are still required to have a phase of accumulation that should occur before the placement of a proper rally which takes time. The amount of accumulation or distribution that has taken place will strictly control the movement of the market.

A weak market has a widespread down-bar, on increased volume, as it comes near a lower trend line. Remember that the vital indicators are the words ‘approaches,’ and ‘increased’ volume.

Both the strength and weakness indicators will take place in different degrees of intensity. It could serve as obvious indications at first, however, as you go along and gain experience, you will realize that there are more obvious signs of strength and weakness.

Ways to Identify Absorption Volume

On a price chart, there are ways to identify absorption volume.

On a price chart, there are times when price breaks a resistance level on Ultra-High Volume and you can rapidly determine this as buying volume and you pass through on the breakout, however, the price turns around and goes to the opposite side. Meanwhile, there a few times that the price action will constantly remain to go upwards during a break of resistance.

“How do I know when a breakout is going to continue to break-out?” – A question that might pop up in your mind.

Well, Absorption Volume is the answer.

So, what are now the ways to identify it on a price chart?

Absorption volume can be noticed on resistance or support areas. According to Tom William’s “Master the Markets,” he pointed that the absorption volume as being a down bar with high volume and the next bar being up, where the selling has been absorbed by the Smart Money. In this situation, the absorption volume turns out to be a sign of strength. In most common cases, this occurrence can be seen around trend lines.

Moreover, absorption volume emerges at resistance levels. During the testing of a price action of a resistance level and we witness a widespread up bar on ultra-high volume and the next bar is an up bar which closes further above the previous bar’s close. The Smart Money considers this as buying.

Upon the occurrence of this maneuver, there’s a possibility that you would still want to witness a few testing back into the ultra-high volume bar. Testing happens solely to check if there are other supplies. Once you get a low volume test, this means that this is bullish and higher prices are expected.

Supply Line and Support Line Chapter 10 As soon as you observe the emergence of a widespread above, on high volume, passing through the top of a trend channel (supply line) and goes higher the following day, then expect that there would be higher prices. Effort versus results – you will get the corresponding result […]

Supply Line and Support Line

Chapter 10

As soon as you observe the emergence of a widespread above, on high volume, passing through the top of a trend channel (supply line) and goes higher the following day, then expect that there would be higher prices.

Effort versus results – you will get the corresponding result from those things which you had put efforts into. As a widespread up-bar, on high volume (effort), amid coming near, however avoiding to pass through the supply line, with the following day down (no results from effort), exhibits that one can be looking out for a reaction (downward move) within the trend, or at the very best a sideways movement.

By selecting two highs and intervening low (points at A, B, and C), trend lines were drawn. Closely, the trend line at point (d) becomes helpful. With the old top at point (c) and moving upwards passing through a resistance area, you need to observe an increase in volume, not low volume. Right now, you are aware that the upper trend line should not be infiltrated at this point.

The point (e) allows the market to react. Take note that for every down-day is on low volume – selling price is not available. If there is an absence of selling pressure, the tendency is that the market will go above. There’s an up-thrust at point (f). Normally, there is no up-thrust in strong markets. There would be an average volume on this up-thrust thus; the markets will continue to go upwards for two days.

Notice that the price spread at point (g) has tightened and misses the mark to reach the upper trend line. Unless there is market bullish at this point, the spread would appear wide and above, possibly gaping above and penetrating the upper trend line. Take note that we already observed a sign of weakness in the background at point (f). The price made a sharp decline the next day on high volume. Then, there was a decline of two days of wide spreads on high volume (selling pressure). All financial markets are made to allow you to lose money to the professionals, making the markets dither above and below within any trend. This will place you under some sort of pressure.

Professional operators execute ruthlessly to remain in business or else everybody would be victors. The market is increasing at point (h) however; the amount of volume is low. The market is unable to go above on low volume following the existence of weakness indicators in the background. Also, we are in the middle of the trading range on the trend line’s portrayal.

There’s a serious sign of weakness at point (i), as a widespread down on high volume indicated it, as the price comes near the lower trend line. Notice the process as to how the prices are immediately declining through the lower resistance area. Upon the drop in the price below the trend line, the market is presently oversold and will transform into a resistance line to higher prices. You have to witness the wide spreads with increased volume in order to infiltrate resistance upwards. Every up-day is on low volume at points (j). An effort is completely non-existent at point (j) to pass through the lower trend line; hence, we are confident to expect lower prices.

Movement Approaching Support

As the price approaches closely to the lower trend line (Support line) in a down-move, any low volume appearing will signify that the trend line is expected to hold for that particular time. That is because an effort to change the trend is non-existent. You will need to push through resistance at the support line.

Unless the volume is high, with a widespread down, amid the movement of price approaching near the lower trend line, a broken trend line due to the extra effort is likely to appear.

Unless the price is coming from the top of a trend line, approaching near the trend line, on low volume, we would likely to see that the trend line will hold due to effort’s absence.

A resistance area is represented by the support line. A selling price is needed by the resistance area to penetrate the support line.

A resistance area is represented by the support line. A selling pressure is needed by the resistance area to penetrate the support line. Remember that low volume would signify that there is minimal selling hence; the line is expected to hold.

Trend-line Excel:Significance of Volume Near a Trend Line

Chapter 9

Essentially, the volume is one of the most significant characteristics in assessing the behavior of stocks around levels of support and resistance. Upon the arrival of a support line, the selling volume is ought to dry up as it advances toward the key level and buying volume should pick up as it departs. This confirms the validity of a support level and the uptrend will carry on. Remember to check the volume before giving any responses only if the price declines below the support level. Unless the volume is low, it isn’t as important as the presence of a heavy sell below the support level. Unless the volume picks up on the drop in the price below the trendline, then this signifies the end of the trend.

A trading range manifests the expected projected area of future trading. To change the trend, it will take you professional activity, money, and effort.

Commonly, the attempt of penetrating trend lines is visible through the movement of prices coming near the line, not actually on the line. Take note that you would typically observe that the attempt of penetrating a trend line through a form of wide spreads up with rising volume.

Also, remember to familiarize yourself with old trends and watch thoroughly when these lines were broken. Study the effort required. One way to overcome resistance is through gapping and the professional money can help you to locate the position of the resistance. Gapping in these areas could be done in numerous times because of the market-makers or specialists’ activity. This effort is mandated to be cost-effective always.

For instance, they are not possible to push up through resistance only if they are bullish. Every sudden activity will constantly have side benefits through panicking traders on the short side who then cover, locking traders in or out of the market, and encouraging traders not to sell.

Resistance is represented through various trend channels:

The resistance line to higher prices is found on the upper line while the resistance to lower prices is represented by the bottom line.

Unless the volume is low on the upward movement of the market to the underside of the trend line, it is not going to go above very far. Nonetheless, upon the break of the trend line on the upside to become overbought, the current line is capable to become a potential resistance to lower prices. Remember that if the price stays longer above the line, the resistance to a down move becomes stronger.

You can expect high volume results upon the upward movement of a stock or Index in price as it reaches the upper trend line along with high volume’s presentation of a widespread up-day. This is because there’s an apparent reason to go above. That is, you would expect that there would be an upward movement in price through the upper trend line. However, if you can’t find results on the high volume by the next bar, then the opposite is likely to be true: the high volume is ought to have confined more selling than buying and will present that the trend is currently holding on.

How about when the high volume was buying, what would be the results of prices the following day?

Trend Trading – Understanding Trend Clusters Chapter 8 The succeeding discussion is based on our research about the creation of the TradeGuider computer program’s automatic trending system which consequently will make the automatic trend clusters. Trend clustering’s principle is basically an essential part of TradeGuider. For numerous years, chartists have been observing the clear resistance […]

Trend Trading – Understanding Trend Clusters

Chapter 8

The succeeding discussion is based on our research about the creation of the TradeGuider computer program’s automatic trending system which consequently will make the automatic trend clusters.

Trend clustering’s principle is basically an essential part of TradeGuider. For numerous years, chartists have been observing the clear resistance and support of old trend lines on a chart. Before the emergence of computers, one person had to well draw trend lines on hand charts into the future.

The facility that holds large numbers of trend channels and stored by a computer allows us to attempt on putting markings where old trends entered through the chart’s leading edge. The reason behind this idea was to realize the possibility of a meeting between a sharp down-move and resistance after a heavy oversold of the market.

In fact, the results are reasonably shocking. The following examples are absolutely candid and unique.

Every block exemplifies an area where TradeGuider has detected old interesting trend lines. Utilizing only trend lines that start before the present page, the TradeGuider draws the blocks. Moreover, it is unfamiliar with the current chart presented however excluding the upper and lower vertical scaling limits.

Every horizontal block put markings on an old trend line entering through the area where the data is presently plotted. These trend lines may be either many years old or comparatively recent. The main clustering area on the former chart displays remarkable and clear resistance points on the downward trend. Observing closely the chart, you would see frequent up-thrusts along with all the weak market principles in force.

TradeGuider contains no information about the current chart ‘page’ that is being displayed on the screen that’s why the appearance of the trend clusters that are well away from the current price action should be disregarded. The importance of trend clusters is only seen if the price action is plotted near to them. Hence, looking at the previous chart, you can disregard the large horizontal trend cluster which is shown at the top of the screen.

Application of Trend Clusters

You see, the first and most important point is where you can find the appearance of a continuous line of blocks. Avoid extending the line of clusters beyond their natural limits. The trends are meeting in the location where trend clusters were plotted. However, the point where they stop enables the trends to begin at diverging. Divergence will lessen their significance. The clusters provide resistance. Market-makers or specialist can take advantage of the opportunity of the spaces between clusters. Next, imagine the clusters as a hedgerow in the countryside rather than a solid obstacle.

The hedge formulates a penetrable barrier. Similar to an actual hedgerow, there are some ways to prevail in the obstacle. There are numerous forms of hedgerow proposing you with amounts of resistance. In overcoming the obstacles, the method that you will use depends on your desire to cross it.

Well, you can quit and process at the hedge, striking the hedge at speed and hit your way through it. Choosing any alternatives, you may attempt to pick your way through. In terms of a thick hedge, you may find a way unless an opening emerges.

Eventually, you will realize that professional traders are interested either to test or to cross-resistance with least amount of effort to them. The specialist will be costing money if they will try to cross-resistance. Remember to observe thoroughly the process of how the highs and lows may be testing the resistance, however; there is a tendency that the closing price might avoid the clusters.

In penetrating old resistance, there is a possibility that a sudden widespread down-bar on high – not necessarily excessive – volume would strike through the resistance or a gap down over it. You may observe that there would be a sideway drifting of prices and walk through a gap. Also, you may see the emergence of a sudden move down through a gap. The debate about this is always open.

In the markets, the professionals know the resistance levels because they have the orders in their books. Further, they have a prospect of market’s both sides on the arrival of the orders from around the globe. Also, they are mindful as to when it becomes difficult to interest business at certain prices. One thing is for sure, the resistance to price movement exists either be upwards or downwards movements.

Even though the S&P500 appears as a liquid market, it still does not like old ‘resistance‘. Look at point (A), the market-driven up and through the resistance. Remember to observe the process of how price attempts to avoid resistance particularly the closing price. Meanwhile, at point (B), the price is again driven down and through the resistance.

Understanding Perceived Value and Trend Lines

Chapter 7

Let us have a broad understanding of this concept of ‘perceived value’ in explaining the reason behind the emergence of resistance at trend lines. Hypothetically, we have three traders namely X, Y, Z. These traders have been in the same stock at the same time.

Trader X has purchased and sold out at a small profit. Then, he made another purchase and sold once his stop-loss was triggered for a small loss.

Trader Y purchased close to the highs and was locked-in once there was a decline in price. This trader is currently holding out in hopes of a reduction in his loss.

Trader Z was shorted and earns a profit.

The buying and selling reasons along with the positions of these three traders hold are irrelevant; expect to manifest the different perceived stock values. There is no definite reason for these trader’s actions but what we can assure is that each of them regards the stock differently.

Trader X made two trades which specified a small loss. This trader lacks concern because better times will absolutely come. He went out of the market and was looking for a new trading stock opportunity. He has seen the weakness from the high and he knows that he was left out for a short position. This trader sets expectations that there would be a decrease in prices and patiently be waiting for a buying technology.

Trader Y is in fear and wants to have increased in price so that he can reduce his losses. If the prices remain to fall, then he will likely be shaken out for a buying opportunity.

Trader Z has a good position. Moreover, this trader sets expectations about a continuous decline in prices. He made a placement of a stop-loss order above the market in safeguarding his profits.

Remember, the important point here is the different perceived values and the three traders’ expectations.

Trader X has a thought of a price where he might go long.

Trader Y reaches a point where he has no option if he can take the pain and will trade at a loss.

Trader Z is happy about his trade and anticipates to profit.

These are just three traders out of many thousands observing and trading the stock. There are some who are hanging on at a loss. Some are in profit. And others are finding opportunity in trading.

What is Perceived Value?

This is the worth or merits that a customer assigns to a product or service. In most circumstances, customers are blind to the factors that are involved in pricing a product or service – either actual or estimated costs of production. They depend on the service or product’s emotional appeal along with their assessment on the benefits that they think could be imparted unto them.

The perceived value of the customer interprets the price that they could pay willingly for a good service. Usually, the customer put value depending on the analytical ability of the product to bring out a need and offer satisfaction. Marketing professionals work on shaping and increasing the perceived value of customers for the goods and services they are selling.

How about Perceived Utility Value?

Utility pertains to the benefits and values a customer receives when he or she utilizes the product. The most common demand of consumers is mostly about the useful and other benefits which a product can offer that others can’t. Even though there are numerous products and services which provide similar benefits, their perceived values differ among consumers. High utility equates to increased demand and further high prices. Companies create marketing campaigns to attract consumers based on these five types of utilities.

What are these types of utilities?

Form Utility

This utility happened when the appeal of the physical design or form of a product attracts consumers or in short if a product has an aesthetic value. An example of this would be the hiring services of an interior decorator to design a room.

Task Utility

This utility happens when performance – pertaining to delivered services – gives value to the customer. An example of this is when a customer receives car detailing.

Time Utility

This utility happens when customer values the availability of a service or product. An example of this would be a 24-hour pharmacy.

Place Utility

This utility happens when a customer values the proximity or convenience of the location. An example of this would be a neighborhood grocery.

Possession Utility

This utility happens when a customer values the easy acquisition of a product. An example of this would be an online shopping platform.

What about the perceived value on brand and luxury goods?

The brand of a company signifies a lot of expectations associated with products and services. A well-known brand is expected to have higher prices compared to other generic brands. The value of the product is dependent on how well the brand meets its customer’s expectations. The demand for a luxury good is parallel to the increasing income of a consumer. People who have more substantial incomes allocate their salary to buying luxury services and goods. Luxury goods make these people have a more enjoyable life with higher regard on their status. The highest value happens when the consumer value of owning these luxury goods instead of their functionality. An example of this would be when a customer values of owning a Rolex watch based solely on the level of prestige it brings whenever he or she wears it.

Defining Oversold Stock and Overbought Stock Levels

Chapter 6

The trading range is the area between the upper and lower trend lines. In VSA terms, when the market trends within its range, it will remain to do so until either selling or buying efforts take place.

The application of our VSA principles will allow a trader to analyze the price action in the upper and bottom quarters of the trading range. Take note that this is important because one can find significant observations that may take place in these areas particularly when the price directs for the support or supply lines respectively.

The area that was found above the supply trend line is commonly called as overbought while the area that was located below the support trend line is known as the oversold. Remember that this could serve as far more reliable indication compared to the traditional methods.

Meanwhile, the mean of the data can be found in the middle of the range. The movement to any direction here has no vulnerability and the price, in theory, can go anywhere.

Bear in mind that the creation of imbalance of supply and demand can be done through accumulation or distribution on the highs or lows. Once this process has been done then the move is weighted to go to the edges of the established trend channel. The vulnerability of reversal can be seen on the hold of the trend at the edges of the trading range. Meanwhile, there would chances of a reversal can be increased in the overbought or oversold areas. However, here the occurrence of a strange phenomenon is possible.

The trend boundary line may appear to provide resistance in both directions. Once there was a penetration of the resistance in one direction and passing through the line, the presence of resistance passing back through the line would be possible with a return into the old trading range.

This can be explained by the market-makers or specialists’ actions. Once that there has been an increased effort to go above the upper trend line (resistance), then professional traders may have taken a bullish view. Take note that this must have been the case so that the price can penetrate the line in the first place.

Although the price comes near the line again from the opposite direction, there’s still a need for you to penetrate the trend line. However, once the specialists or market-makers remained bullish, then there will be no effort to go back down.

The determinant as to when the line will hold is based on the amount of volume. Knowingly that there’s a need for you to penetrate trend line, the manifestation of any low volume as the price comes near the line will serve as an indication that it is dubious to be breached as of this time. This can also be happened to lower trend line.

There are numerous Forex traders who think that engaging in Forex trading is all about buying an uptrend and selling in a downtrend. Well, the truth is, there are several factors that could determine whether there is an end in profit or not in a trade like the overbought and oversold conditions.

Overbought and Oversold?

If there’s a movement of a pair in an uptrend, the pair could reach the point where there would be the absence of buyers on the market. From this, the currency is overbought and a reverse in trend could be possible. This likewise happens to downtrend. If the price is too cheap and there’s absence of sellers on the market, then the currency is oversold. Thus, this will pave the way toward a potential uptrend.

Here’s a basic element you don’t want to miss, the price of a currency is not possible to move in one direction infinitely. At a point, the price is expected to undergo a change in its direction. The occurrence of a change in direction can be seen for many reasons. Take note that one of its important reasons is whether the price is overbought or oversold.

The currency pair which either overbought or oversold is potential to reverse. However, this is the case for the entire time. Remember that the pair may also remain in either oversold or overbought condition for a long time. In determining the existence of price reversal, the use of Oscillators is advisable.

Like any other conditions, you can use these two of the common tools or indicators to determine the existence of overbought and oversold conditions:

What are the indicators?

Relative Strength Index (RSI)

This is a range bound oscillator which has 0 to 100 scales. If there’s an above 70 reading, the RSI indicates that there’s an overbought situation. Meanwhile, if there’s a below 30 reading, the RSI indicates that there’s an oversold situation. In usual cases, traders can go short if there’s a 70 reading in the RSI while they can choose to go long when there’s a reading of 30 in the RSI. Moreover, the RSI can be utilized in combination with other indicators for best results.

Stochastic Oscillator

This is a simple momentum oscillator which can help to identify overbought and oversold conditions. Similar to RSI, this has a scale of 0 to 100. When it reads above 80, it indicates that the pair is overbought whereas if it reads below 20, then it indicates that the pair is oversold.

Take note: Although both RSI and Stochastic can be helpful in determining oversold and overbought levels, they differ in underlying theories and methods. The RSI is commonly used in trending markets while the stochastic is more helpful in sideways or choppy markets.

How to Gain a Maximum Profit?

In acquiring the maximum profit out of a trade, the use of overbought and oversold conditions is also significant. You can get the best out trade particularly when you try to buy amid a downtrend reverses or when you try to place a sell order directly at the downtrend’s start. Well, you can develop your own strategies coming from conditions of overbought and oversold. Make thorough researches to fully understand the process of overbought and oversold oscillators and from this, you can start developing yours.